Investors who didn’t climb back into property stocks a year ago when most counters were still languishing at multiyear lows are probably kicking themselves.
The strength of the sector’s rebound, which saw the South Africa listed property index finally return to pre-pandemic levels, surprised even the most bullish of analysts.
The sector notched up a total return of 29% for 2024, comfortably ahead of bonds (17.2%), the all share index (13.5%) and cash (8.5%).
In fact, 2024 was the second consecutive year that listed property pipped other asset classes to the post, even though 2023’s 10.1% was only marginally ahead (see graph).
Nearly a dozen of the JSE’s 40-odd property stocks delivered a total return exceeding 40% last year, most of which were South Africa-focused. Domestic real estate investment trusts (Reits) delivered an average 35% total return in 2024, according to the SA Reit Association.
Top performers include Texton, Attacq, Hyprop Investments, Fortress Real Estate Investments, Fairvest, Collins Reit, Dipula Income Fund, Resilient Reit and Emira Property Fund.
Offshore counters generally ended the year with a less impressive performance, with Eastern Europe-focused MAS and Nepi Rockcastle, as well as Iberian retail play Lighthouse Properties, being notable exceptions.
UK-based Primary Health Properties and Shaftesbury Capital, as well as German/UK business park owner Sirius Real Estate, count among the worst offshore-domiciled stocks.
Garreth Elston, MD of equity research firm Golden Section Capital, says the exceptional returns achieved by last year’s winners were driven by several factors. They include better than expected results, particularly in Texton’s case, which was one of the sector’s biggest laggards in 2023.
Retail-focused Hyprop’s rally came after the company finally exited its investments in Ghana and Nigeria, as well as management providing a much-improved earnings guidance for the 2025 financial year.
Attacq’s substantial rerating was supported by ongoing value unlock at its flagship Waterfall City mixed-use node in Midrand as well as capital allocation refinement.
Elston adds: “The glow from the formation of the government of national unity [GNU], the dawn of interest rate cuts, and the ‘end’ of load-shedding all contributed to almost all boats being raised by the tide.”
Independent property analyst Keillen Ndlovu says the sector’s stellar performance was further boosted by improved trading metrics in underlying retail and industrial property portfolios.
Even the troubled office market, where vacancies had surged to record highs after the pandemic, has finally stabilised as corporate employees returned to their desks, albeit only for three to four days a week.
Most property companies also used the past two to three years to dispose of noncore assets to strengthen balance sheets and bring loan-to-value ratios and interest cover ratios under control.
Ndlovu says that as a result, property companies finally started to report an improved earnings outlook towards the second half of 2024.
He expects the sector to return to inflation-beating earnings growth later this year and into 2026 when the positive impact of lower interest rates will be fully felt.
The upshot is that listed property as an asset class has reappeared on institutional investor radars.
Referring to the latest data from Alexforbes and Spectrum, Ndlovu notes that balanced/multi-asset and generalist fund managers’ allocation to listed property rose from a record low of 2.75% of total assets at end-2022 to 3.5% in November. That compares to pre-pandemic levels of 5%-6%.
Though 2024 was a cracker for listed property after 2023’s tentative recovery, share prices are still trading about 50% below their 2017 peaks.
“It has been a very long, stressful and expensive journey for investors over the past seven years,” says Elston.
Does that mean investors can expect similar bumper returns this year as the sector continues to claw back multiyear losses? Not necessarily; most analysts expect a more muted 10%-14% total return for 2025.
Elston points out that the flurry of companies scheduled to report December results in the coming weeks should indicate whether 2024’s recovery was overdone or whether the sector has more room to run.
However, he says 2024’s tailwinds are likely to subside in the coming months as the risk of rising trade conflicts, interest rate pauses, sticky inflation and the potential drop in US support for Ukraine’s war against Russia increases under new president Donald Trump.
“The local market will be at the mercy of Trump administration trade policies, while the rand’s weakness in December may put further rate cuts at risk.”
Ndlovu cites a number of other potential headwinds that could dampen investor sentiment and listed property returns in 2025: municipal service charges that continue to increase at above-inflation levels, increased water outages, a resumption of load-shedding, stalling economic growth and the unravelling of the GNU.
But the flip side is that a continued improvement in underlying metrics across all property subsectors, amid declining bond yields and further rate cuts, will support dividend growth.
Ndlovu says that’s likely to continue to attract income chasers back into the sector, which will further boost share prices.
Meago Asset Managers director Anas Madhi expects the JSE’s plans to broaden the investable universe by including more small- and mid-cap counters in the all property index (Alpi) to also help lure more institutional investors.
The Alpi is the go-to real estate benchmark tracked by larger fund managers, which are typically mandated to take positions in index participants.
The four new entrants expected to join the Alpi in March are Dipula Income Fund, Octodec Investments, Spear Reit and Schroder European Reit.
Madhi says smaller and midsize property stocks — especially those that aren’t part of the Alpi — have typically lagged their larger peers in terms of share price recovery.
While several larger stocks may already look fully priced, there’s still a lot of value sitting in smaller caps, he says.
“We see plenty of value-unlock potential among those that will be included in the Alpi index this year.’’
Elston agrees that Dipula, Spear, Octodec and Schroder’s inclusion in the Alpi could serve as a catalyst for a rerating of these stocks.
He adds that local counters that focus on defensive sectors such as township and rural retail, which have proved resilient come rain or shine, are also likely to outperform in 2025.